Finland Limps Down Road to Euro Treaty Failure

Finland is sliding down a recession-greased slope and risks building up more debt than euro-zone members are allowed to have.

As early as 2015, Finland “won’t really have the means” to keep debt below the 60 percent threshold of gross domestic product allowed in the euro area, according to Pasi Holm, managing director at Helsinki-based PTT Research Institute.

“Economic growth would help, but there’s none to be seen,” Holm said in an interview.

The recession Finland sank into last year will continue through 2013, according to a Bloomberg survey of 11 economists. The development threatens to deplete government revenue and make it more difficult for the nation to live up to Europe’s budget rules, Holm said. Prime Minister Jyrki Katainen, who says Finland’s AAA is at risk, is meeting with lawmakers and industry groups today to design a roadmap out of the country’s economic and fiscal plight.

“If adequate structural reforms aren’t made and if we don’t get a wage deal that improves our competitiveness, then we are running a great risk of losing our credit rating,” Katainen said on a radio channel of the national broadcaster YLE yesterday. “That would mean that government debt yields would begin to rise.”

Katainen’s six-party coalition said on Friday the 2013 budget deficit will be 1.2 billion euros ($1.6 billion) wider than previously estimated, at 9 billion euros, as Finland’s economic contraction cuts into government income.

Negative Returns

The yield on Finland’s benchmark 10-year bond rose two basis points on Friday to 2.21 percent, its highest in at least a year. Finnish government debt longer than one year has delivered investors a 2.7 percent loss this year, according to Bloomberg/EFFAS indexes. By contrast, bonds sold by the government of Spain yielded a positive return of 7.8 percent in the same period. Finland’s 10-year yield traded at about 2.2 percent as of 12:14 p.m. in Helsinki today.

“We need specified structural reforms with schedules that are committed to,” Holm said.

The Treaty on European Union, also known as the Maastricht Treaty after the Dutch town it was signed in, outlined the criteria that prospective and existing euro members are supposed to fulfill. The treaty requires governments to keep deficits within 3 percent of GDP and debt below a 60 percent threshold.

“These limits are important psychologically, they act as alarm bells to credit rating companies and others,” Holm said.

Failed Austerity

Finland has been one of the few nations to comply with the Maastricht rules, even when its economy contracted more than 8 percent in 2009. It’s the only remaining euro member to receive a stable AAA grade from the three major ratings companies. Katainen has said any policy steps he takes will be designed to safeguard the nation’s top credit rating.

“Finland has lost competitiveness for a long time,” Katainen said today. “Recognizing the facts must lead to corrective action. Time won’t solve our problems.”

The finance ministry said in June its debt-to-GDP ratio will grow to 59.9 percent in 2015 from 57.1 percent this year. The average debt ratio in the euro area increased to 92.2 percent in the first quarter, Eurostat said on July 22.

Finland’s failed attempts at austerity are to blame for its debt growth, according to Timo Tyrvaeinen, chief economist at Aktia Bank Oyj. The Nordic nation, which has struggled to rebound from the decline of flagship companies such as Nokia Oyj as well as its paper industry, will “undoubtedly” breach the 60 percent debt ceiling at some point, he said.

‘Hung Up’

“Katainen’s government has perhaps hung up too much on the thought that a AAA rating can only be preserved by cutting spending and increasing tax revenue,” Tyrvaeinen said by phone. “Should our government announce that they’ve learned from austerity and chosen a different path, the Anglo-American market could well applaud such acumen.”

Katainen’s government will this month look into reform proposals backed by Finance Minister Jutta Urpilainen, who has pledged to strike an accord on a structural overhaul of the economy by the end of the year.

“It’s impossible for me to think that no significant decisions would be made,” Tyrvaeinen said. “In order to keep the markets’ confidence, we need the structural reforms.”

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